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Greek Loan Would Violate IMF Charter

The proposed International Monetary Fund loan of $15 billion to
Greece is wrong on two grounds. First, it violates the IMF’s
charter. Second, it is an unwarranted favor to Europe that
developing countries will perceive as being at their expense.

The IMF suffers from mission creep. Although created for balance
of payments rescues, it now wants to stage fiscal rescues too
— that means bigger budgets and more staff, the two unwritten
goals of any bureaucracy.

The articles of association of the IMF state clearly its aim to
provide loans for balance of payments support. Greece has a huge
fiscal need but no balance of payments need. Greek importers can
get all the euros they wants from Greek banks, which get euros from
the European Central Bank. The IMF is by definition a monetary
authority, and Greece has no monetary issues — it surrendered
its monetary powers to the ECB Bank on joining the eurozone. Some
eurozone countries have fiscal crises, but these are Europe’s
problem, not the IMF’s.

It is easy for the IMF to
jump into this mess, but will be hard to extricate itself if things
go wrong.

The IMF’s funds proved wholly inadequate to meet balance of
payments needs during the Great Recession of 2007-09. So member
countries tripled its lending resources to meet future balance of
payments crises, which presumably did not include fiscal
crises.

If Greece gets an IMF lifeline, bond speculators will logically
attack the other eurozone countries with large deficits —
Portugal, Spain and maybe Italy. Rescuing them would empty the
coffers of the IMF. Yet it would be politically difficult to say no
to Spain or Italy after saying yes to Greece.

Historically, there was a clear division of work between the
World Bank and IMF. The Bank provided fiscal support for
development, so its loans entered the budgets of borrowers. The IMF
provided hard currency for balance of payments support. This hard
currency was purchased by the central bank of the borrower, and
went into the borrower’s foreign exchange reserves, not its budget.
Indeed, loans from the IMF were technically called “purchases” of
hard currency, and repayments were called “repurchases.”

This Bank-IMF division of labor has blurred since 1991.
Ex-communist countries needed massive support, and it was
politically expedient to use the full resources of the Bank and
IMF. The blurring was rationalized by arguing that the IMF always
sought fiscal stringency when lending. Further, even when such
loans went to central banks, they enabled central banks to give
more budget support to their governments. This blurring also
facilitated emergency loans during the Asian Financial crisis. IMF
loans to Russia and Argentina were formally allowed to enter the
budgets of the borrowers.

By the same logic, say Europeans, the IMF should give fiscal
support to Greece. They are wrong. Argentina, Russia and all the
other IMF borrowers had serious balance of payments problems. The
IMF gave loans to tackle these balance of payments problems —
in accordance with its charter — and the fiscal support was
just a supplementary benefit.

Greece, however, has no balance of payments problem. Any IMF
rescue would be straightforward fiscal support, violating the IMF’s
charter. Why would it do this? To bestow a special favor on
Europeans, its dominant shareholders.

Developing countries should be expected to protest. They are the
main candidates for future IMF loans, and so feel they have the
most to lose through fund diversion. The poorer members do not have
the political or economic strength to stand up to Europe, but the
BRICs (Brazil, Russia, India, China) do. The BRICs have contributed
to the IMF’s expanded coffers and need to worry about the
husbanding of those resources.

The IMF is supposed to be lender of last resort. Europeans want
it to be among the lenders of first resort in this crisis. Greece
can, after all, borrow from the markets, but it will have to pay 7%
interest. Instead of relying on market discipline, the Europeans
seek to use IMF to organize a rescue package with an interest rate
averaging maybe 5%. This implicit interest subsidy is justified by
saying Greece will default if it has to pay 7 % interest. Maybe,
but many analyses suggest that Greece is fundamentally insolvent
and will likely default anyway.

It is easy for the IMF to jump into this mess, but will be hard
to extricate itself if things go wrong. Developing countries should
protest that limited IMF funds are being put at risk just to spare
Europe from taking care of its own.